Focus: Zalando - profit is so last season
Aggressive expansion plans have fuelled Zalando's sales growth
Latest first-half results for Berlin-based fashion e-tailer Zalando highlighted revenue up 32% to EUR1.4bn (US$1.6bn), while profit margins dipped to 3.5% from 6% the previous year. In order to maintain growth momentum, where should the business focus its attention? asks Bernadette Kissane, apparel and footwear analyst at Euromonitor International.
The future of fashion lies in e-commerce, as internet retailing in apparel and footwear is expected to increase at a CAGR of 14% to 2019, compared to a CAGR of 2% for the overall market. This is promising news for Zalando, the Berlin-based fashion e-tailer that is striving for continued growth over profit. Despite the company's leading position within the e-commerce sphere (currently ranked sixth globally), it continues to report robust growth rates normally associated with successful start-ups.
The Zalando way
Key competitor Asos, although one of the first success stories in e-commerce, remains six places behind Zalando in the ranking of global pure online players, which is likely to be a result of two factors. Firstly, Zalando boasts a much wider product offering appealing to a much larger target audience and secondly, the differing expansion strategies.
Asos is following the fashion crowd into markets such as the US, Australia and Asia, while Zalando concentrates on developing its presence in European markets, perfecting what it does best in familiar territory, similar to the strategy adopted by Primark. Given that Germany, Switzerland and Austria account for a huge proportion of sales, plenty of scope remains for the e-tailer in core apparel markets such as France and the UK where it currently holds no visible value share.
Footwear is not enough
Initially an online footwear destination, the company has expanded its product range to include clothing for women, men and children. Continued developments in its product offering also pose significant opportunities, most notably, childrenswear and sportswear, as the two fastest growing categories in apparel, with 6% and 7% global growth in 2014, respectively. Furthermore, the company could utilise the wealth of consumer data it possesses by launching its own label that would provide much higher return rates with better margins.
Zalando's primary aim is to provide exceptional customer service, and one way in which it has gained significant traction in many European markets is by offering a number of payment options, including an invoice system. The company enables consumers to make payments after the products have been delivered; this is an approach recently adopted by Asos in a bid to capture additional share. Unfortunately, this business model comes with a number of risks, such as online fraud which has resulted in Zalando announcing a loss of an estimated EUR18.5m. Currently there are no plans to remove the payment option, given that is has become an integral part of its service, aiding customer satisfaction. However, it also has the potential to do more harm than good.
Evolving digitally…and profitably
Investing in a better-rounded product offering and continuing to innovate with branding and loyalty schemes, such as the Zalando Lounge, will help maintain the company's position within Europe. However, in order to capture future global growth, further developments are required. As a new generation of consumers enters the market, a seamless shopping experience will be vital. Zalando needs to remain ahead of the curve in digital advancements, such as m-commerce and s-commerce, if it hopes to obtain leadership status worldwide.
Although aggressive expansion plans have fuelled sales growth, operating profit has taken a hit. Unfazed by the issue, the company intends to move forward with a business strategy that prioritises growth over profit. Given the untapped potential, both in new markets and categories, this is a logical move for the expanding e-tailer; however, at some point, profit will need to be trendy again.
About the author: Bernadette Kissane is an apparel and footwear analyst at Euromonitor International, where she is responsible for publishing research studies related to corporate strategies, market entries, competitive intelligence and opportunity analysis in the global apparel and footwear industry.
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